The Kobe Steel crisis is more than a corporate governance issue

 
Estelle Clark
At Kobe Steel, the falsification of data appears to have become the norm

The unfolding crisis at Kobe Steel lays bare some uncomfortable questions for all senior executives.

For those who haven’t been following the story, the facts are these. Falsified quality inspection data for aluminium, copper and steel parts has been supplied to a range of industries across the world, including aircraft manufacturers, carmakers and the construction industry. Estimates suggest that the falsification of data has been on-going for circa 10 years, if not longer.

The commercial and legal impacts of this scandal are already becoming clear. One of Japan’s largest companies is now on its knees, with enormous damage to its corporate reputation, a collapsed share price and the potential for decades of costly litigation. What’s more, the European Aviation Safety Agency has already advised aircraft makers to buy steel from alternative sources and the United States Department of Justice is investigating.

Read more: Japan's Kobe Steel tumbles after admitting to falsified data

What is impossible to accurately assess is, to paraphrase one of the most famous lines from Watergate, “what the board knew and when the board knew it”.

It is clear is that there has been chronic institutional failure and the board must take ultimate responsibility. There are obvious questions to answer about the falsification of data, but I suspect that something much deeper is going on here.

It is one of the ironies of the governance debate that, at times of crisis, questions around corporate governance at board level are quickly aired. Too often however the key issue is operational, with a key factor being company culture. At Kobe Steel, the falsification of data appears to have become the norm, an accepted practice that has been neither questioned nor reported. That is a cultural issue, which falls under operational governance.

The crisis highlights an abundance of questions that the boards of all companies need to ask themselves about their own cultures.

What measures can the board introduce to ensure that communication is two-way and not just a top-down approach?

Is the board only getting information from official channels and what risk does that pose?

What unofficial channels can Non-Executive Directors, in particular, tap into to get a more rounded view of the company’s operations?

Are whistleblowing employees treated as nuisance troublemakers or, as they should be, an early warning system and a valuable part of the feedback loop?

Crucially, can whistleblowers bring matters to senior managers and the board without fear of losing their job or being denied promotion?

These questions can only be answered if the board of directors is willing to widen its own remit, outside of the normal confines, and take a more holistic view of their companies and their own responsibilities. The board sits at the apex of an organisation, all-too-often removed from day-to-day operations, but the answers to these questions will be found in the body of the organisation not in the audit and remuneration committee.

Read more: Will corporate governance changes damage the UK’s business credentials?

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